Chapter 11 Introduction

Chapter 12 What is Macroeconomics? Study of the aggregate behavior in an economy Study of the aggregate behavior in an economy Study of the determinants of price level, output, and employment Study of the determinants of price level, output, and employment Put less formally, macroeconomics is about understanding the causes of prosperity and poverty. Put less formally, macroeconomics is about understanding the causes of prosperity and poverty.

Chapter 13 Macroeconomics and policy Recognition that the macroeconomy is affected by government policy Recognition that the macroeconomy is affected by government policy Purpose of policy: affect a desired outcome Purpose of policy: affect a desired outcome Policy may have undesirable consequences Policy may have undesirable consequences

Chapter 14 Key questions: What determines the level of out output? What determines the level of out output? What determines the level of employment? What determines the level of employment? What determines the level of prices? What determines the level of prices?

Chapter 15

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9 Business Cycle

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Chapter 111 Historical perspective Macroeconomics did not become a separate discipline until the depression Macroeconomics did not become a separate discipline until the depression

Chapter 112 Events leading up to the development of Macroeconomics Founding of the National Bureau of Economic Research in the 1920s. Founding of the National Bureau of Economic Research in the 1920s.  Purpose: Collection and systemization of economic data  Led by Simon Kuznets, who developed national income accounting business cycles business cycles Great Depression—laid the back drop for the work of John Maynard Keynes Great Depression—laid the back drop for the work of John Maynard Keynes

Chapter 113 J.M. Keynes ( ) Wrote the book The General Theory of Employment, Interest, and Money Wrote the book The General Theory of Employment, Interest, and Money Asserted that market economies are not self adjusting Asserted that market economies are not self adjusting Purpose: save capitalism Purpose: save capitalism

Chapter 114 Causes of the Depression Keynes—collapse of aggregate demand Keynes—collapse of aggregate demand Kindleberger—collapse of world trade, and the lack of a global lender of last resort Kindleberger—collapse of world trade, and the lack of a global lender of last resort Friedman—depression resulted from government intervention Friedman—depression resulted from government intervention

Chapter 115 Macro over time 1930s—depression 1930s—depression —WWII —WWII 1945—1970 Golden Age of American capitalism—low unemployment, low inflation, high profits 1945—1970 Golden Age of American capitalism—low unemployment, low inflation, high profits  1964—Kennedy tax cut, first conscious use of Keynesian economic theory  Late 1960s—Vietnam

Chapter s—rising inflation and rising unemployment 1970s—rising inflation and rising unemployment  1974—4 fold increase in the price of oil  Stagflation Rise of monetarism Rise of monetarism  Propelled by the criticisms of M. Friedman in particular  Backdrop: rising inflation of the 1970s  1979—Paul Volker appointed chair of the Fed—followed monetarist prescriptions

Chapter 117 The Reagan 1980s High unemployment, 13% inflation, 20% interest rates High unemployment, 13% inflation, 20% interest rates Regan—abandons Keynesian demand management policies Regan—abandons Keynesian demand management policies Adopts supply-side economics Adopts supply-side economics Tight monetary policy combined with tax cuts and rising military spending Tight monetary policy combined with tax cuts and rising military spending Result: large deficits Result: large deficits

Chapter 118 The Clinton Years Booming economy combined with the end of the cold war Booming economy combined with the end of the cold war Cuts in military expenditures combined with rising tax revenues reduces deficit Cuts in military expenditures combined with rising tax revenues reduces deficit Economy characterized by low inflation, low unemployment, and government surpluses Economy characterized by low inflation, low unemployment, and government surpluses Potential Problem: low savings rates and a booming trade deficit, and a runaway stock market Potential Problem: low savings rates and a booming trade deficit, and a runaway stock market Paradox: why is their no inflation Paradox: why is their no inflation Globalization of the world economy Globalization of the world economy

Chapter 119 The Bush Years Terrorism and the economic impact Terrorism and the economic impact Corporate scandals and the collapse in confidence Corporate scandals and the collapse in confidence